German court weighs legality of ECB crisis measure

By DAVID McHUGH , Associated Press

Jun. 11, 201312:29 PM ET

KARLSRUHE, Germany (AP) — Top European financial officials testified Tuesday for and against a European Central Bank program that has been instrumental in calming the euro debt crisis as it faced a legal challenge in Germany's highest court.

Michael Probst

An emergency phone at a bus stop is pictured near the Euro sculpture in front of the European Central Bank, ECB, in Frankfurt, Germany, Tuesday, June 11, 2013. A key ECB program that has been credited with calming the 3 1/2 year-old euro debt crisis faced a legal challenge Tuesday in Germany's highest court. The Federal Constitutional Court in Karlsruhe is considering arguments against the ECB's offer to buy government bonds and lower borrowing costs for indebted countries. Opponents of the bond-buying program say the program oversteps the ECB's mandate, which forbids it from financing governments. (AP Photo/Michael Probst)

An emergency phone at a bus stop is pictured near the Euro sculpture in front of the European Central Bank, ECB, in Frankfurt, Germany, Tuesday, June 11, 2013. A key ECB program that has been credited with calming the 3 1/2 year-old euro debt crisis faced a legal challenge Tuesday in Germany's highest court. The Federal Constitutional Court in Karlsruhe is considering arguments against the ECB's offer to buy government bonds and lower borrowing costs for indebted countries. Opponents of the bond-buying program say the program oversteps the ECB's mandate, which forbids it from financing governments. (AP Photo/Michael Probst)

The new headquarters of the European Central Bank, ECB, is seen behind barbed wire in Frankfurt, Germany, Tuesday, June 11, 2013. A key ECB program that has been credited with calming the 3 1/2 year-old euro debt crisis faced a legal challenge Tuesday in Germany's highest court. The Federal Constitutional Court in Karlsruhe is considering arguments against the ECB's offer to buy government bonds and lower borrowing costs for indebted countries. Opponents of the bond-buying program say the program oversteps the ECB's mandate, which forbids it from financing governments.The ECB moves into the building in 2014. (AP Photo/Michael Probst)

The euro sculpture stands in front of the European Central Bank, ECB, in Frankfurt, Germany, Tuesday, June 11, 2013. A key ECB program that has been credited with calming the 3 1/2 year-old euro debt crisis faced a legal challenge Tuesday in Germany's highest court. The Federal Constitutional Court in Karlsruhe is considering arguments against the ECB's offer to buy government bonds and lower borrowing costs for indebted countries. Opponents of the bond-buying program say the program oversteps the ECB's mandate, which forbids it from financing governments. (AP Photo/Michael Probst)

The new headquarters of the European Central Bank, ECB, is seen behind barbed wire in Frankfurt, Germany, Tuesday, June 11, 2013. A key ECB program that has been credited with calming the 3 1/2 year-old euro debt crisis faced a legal challenge Tuesday in Germany's highest court. The Federal Constitutional Court in Karlsruhe is considering arguments against the ECB's offer to buy government bonds and lower borrowing costs for indebted countries. Opponents of the bond-buying program say the program oversteps the ECB's mandate, which forbids it from financing governments.The ECB moves into the building in 2014. (AP Photo/Michael Probst)

The Federal Constitutional Court in Karlsruhe is considering arguments against the ECB's program, which has been credited with easing turmoil in bond markets in the 17-country eurozone but which some say oversteps the ECB's mandate.

The hearing showed how the ECB's actions were splitting Germany's financial heavyweights in two camps.

German Finance Minister Wolfgang Schaeuble bluntly told the court it had no authority to rule on the program and highlighted how the ECB had saved the euro currency bloc from potential disaster.

But the president of Germany's influential central bank, Jens Weidmann, warned that the ECB's actions were threatening the independence of its own monetary policy.

The program — known as Outright Monetary Transactions, or OMTs — is an offer by the ECB to buy the government bonds of a country in need of financial help. The purchases would help by lowering the country's borrowing costs in the bond markets.

The program was launched in September after ECB President Mario Draghi dramatically vowed in July to "do whatever it takes" to save Europe's common euro currency.

The ECB hasn't bought any bonds yet. But the program's mere existence has helped lower countries' borrowing costs in bond markets dramatically, easing fears the eurozone might break apart. To take part in the scheme, a country would have to commit to reduce its debts and deficits, as well as accept a bailout loan or credit line from the European Union's financial rescue fund, the European Stability Mechanism.

CRITICS

EU efforts to rescue financially troubled countries have run into popular opposition in countries like Germany, the Netherlands and Finland, which have been net contributors to the eurozone's financial rescue programs.

In Germany, opponents of the bond-buying program say it oversteps the ECB's mandate, which forbids it from financing governments.

"I see considerable stability-policy related problems with the programs to purchase government bonds (...) that blur the boundary between European monetary policy and the member nations' financial policies," said Weidmann.

Weidmann, who represents Germany on the ECB's interest rate decision-making council, also worries that the ECB's program might take the pressure off governments to make vital economic and financial reforms.

The people who brought the legal challenge to court are a disparate group of Germans including conservative lawmaker Peter Gauweiler, a team of professors, a citizens' organization and Germany's Left Party.

They claim the measure is illegal because both EU laws and the German constitution say that only the elected national parliament can decide how taxpayer money is spent.

Dietrich Murswiek, one of the plaintiffs' attorneys, argued that the bond purchase program exposed taxpayers to hundreds of billions of euros (dollars) in potential losses if the bonds are not repaid — without any democratic authorization from national parliaments.

"The ECB is turning the currency union into a liability union, without asking member states and their parliaments," he said.

The arguments against the ECB program have been added to another challenge against Germany's backing of the European Stability Mechanism, the bloc's permanent 500-billion-euro bailout fund.

SUPPORTERS

Defenders of the ECB program say it is legal and is needed for the ECB to fulfill its mission — keeping consumer prices stable across the eurozone.

Finance Minister Wolfgang Schaeuble argued the ECB had remained within its mandate.

He also said it was "highly questionable" whether the constitutional court had the legal right to rule on the ECB's actions given that the ECB is an independent institution and is governed by EU law. He argued that if Germany's top court had the power to veto ECB actions, then the national courts of each of the 17 eurozone countries could do the same — that would be a legal nightmare that could hinder the ECB's every move and erode market confidence.

Joerg Asmussen, a former deputy German finance minister who has since been appointed to the ECB's six-member executive board, backed Schaeuble's claims.

He downplayed the risk of losses to taxpayers, saying that if a government failed to repay the ECB, the central bank would absorb losses initially.

Above all, he said the program was crucial to the future of the currency union because it helped fight market fears "regarding an involuntary breakup of the euro area."

"We can say that the announcement of the OMT made a significant contribution to the stabilization of the system," he said. "Companies, banks and households in the entire eurozone profited from this measure. Destructive, extreme scenarios were eliminated and the damaged transmission mechanism was to a significant extent repaired."

In Berlin, Chancellor Angela Merkel noted that every eurozone rescue measure so far had been discussed and approved by Germany's supreme court. She said she was confident the constitutional court would clear the ECB's program.

WHAT NEXT

Karlsruhe judges will hear oral arguments Tuesday and Wednesday; a decision might not come for several months.

A sweeping ruling against the ECB's program would effectively torpedo it. Analysts say an outright rejection is highly unlikely but markets are watching to see if the judges attach any conditions that might raise doubts about its effectiveness.

It's possible that some issues could be referred to the EU's own court, the European Court of Justice.

KARLSRUHE, Germany (AP) — Top European financial officials testified Tuesday for and against a European Central Bank program that has been instrumental in calming the euro debt crisis as it faced a legal challenge in Germany's highest court.